Mumbai Infrastructure Investment Trusts (InvITs) enjoy immunity from insolvency proceedings and should fall under the Insolvency and Bankruptcy Code, a senior SBI official said on Friday.
Ashwini Kumar Tewari, managing director of the bank, said lenders need assurance that they can recover their InvIT dues in case of default, adding that they are in touch with the Reserve Bank and the government in this regard.
"We need to bring these trusts, which are far from bankruptcy, within the ambit of the IBC because that will go a long way in giving us the assurance that it is like any other asset," Tewari said, addressing an NBFC event organized by the industry. Assocham lobby here.
He explained that currently, the primary responsibility of an InvIT or a special purpose vehicle under it is to the trust holders and there are "gaps" that need to be filled.
"This space needs clarification; this space needs assurances to lenders that in case there is (legal) proof of default etc., it will be the same as any other loan they make within this (infrastructure) space," he said .
Tewari mentioned that banks also lack the power to change the management of entities, which is a key feature of the IBC provisions and has already been invoked in the past.
He also made it clear that SBI is "very bullish" on the InvITs space because it removes the bank's long-term risk once a project is completed, and also because it provides a steady flow of cash to pension funds and other investors.
The IBC was enacted in December 2019, while InvIT saw its first listing in 2017.
Meanwhile, Tewari also questioned the need for a non-banking financial company (NBFC) to have a long list of lenders and proposed consortium arrangements therein.
"'We believe that if there are so many banks involved, each with a smaller stake, and yet the total size of the credit is large, the only conclusion that can be drawn is monitoring, and the portfolio control mechanism then is so much smaller. And that's something we don't feel very comfortable with," he said.
Tewari made it clear that the SBI has brought the issue to the attention of the RBI and said banks do not want any limit on the number of relationships an NBFC maintains.
Currently, a bank gets a separate list of debtors and has to do a sample check on each account, which is "not a good way" to manage huge risks, Tewari said, adding that in case of a manufacturing industry of similar size or a service company, the number of banking relationships is much smaller.
If this sector has to sustain itself, this particular issue needs to be resolved, he added.
Tewari welcomed the increased levels of awareness and strength among South Indian NBFCs on internal auditing and said this helps reduce any instances of risk.
The increased regulatory scrutiny of the NBFC sector is courtesy of the stress the sector faced after the IL&FS crisis in 2018-19, and also the growth we have witnessed, he said.
Currently, more than half of the funding needs of the NBFC sector are funded by banks and the risks involved need to be taken into account, Tewari said, advocating for similar regulation between banks and NBFCs.
National rating agency Icra's financial sector ratings group head Karthik Srinivasan said the banking industry's exposure to NBFCs is at an all-time high of more than a tenth of the overall portfolio, adding that NBFCs that are able to maintain better credit quality will not face any funding challenges.
There are some sectors where there are asset quality issues, he said, adding that some retail NBFCs have been growing riskier unsecured books at double the pace of overall growth in assets under management.
Ashwini Kumar Tewari, managing director of the bank, said lenders need assurance that they can recover their InvIT dues in case of default, adding that they are in touch with the Reserve Bank and the government in this regard.
"We need to bring these trusts, which are far from bankruptcy, within the ambit of the IBC because that will go a long way in giving us the assurance that it is like any other asset," Tewari said, addressing an NBFC event organized by the industry. Assocham lobby here.
He explained that currently, the primary responsibility of an InvIT or a special purpose vehicle under it is to the trust holders and there are "gaps" that need to be filled.
"This space needs clarification; this space needs assurances to lenders that in case there is (legal) proof of default etc., it will be the same as any other loan they make within this (infrastructure) space," he said .
Tewari mentioned that banks also lack the power to change the management of entities, which is a key feature of the IBC provisions and has already been invoked in the past.
He also made it clear that SBI is "very bullish" on the InvITs space because it removes the bank's long-term risk once a project is completed, and also because it provides a steady flow of cash to pension funds and other investors.
The IBC was enacted in December 2019, while InvIT saw its first listing in 2017.
Meanwhile, Tewari also questioned the need for a non-banking financial company (NBFC) to have a long list of lenders and proposed consortium arrangements therein.
"'We believe that if there are so many banks involved, each with a smaller stake, and yet the total size of the credit is large, the only conclusion that can be drawn is monitoring, and the portfolio control mechanism then is so much smaller. And that's something we don't feel very comfortable with," he said.
Tewari made it clear that the SBI has brought the issue to the attention of the RBI and said banks do not want any limit on the number of relationships an NBFC maintains.
Currently, a bank gets a separate list of debtors and has to do a sample check on each account, which is "not a good way" to manage huge risks, Tewari said, adding that in case of a manufacturing industry of similar size or a service company, the number of banking relationships is much smaller.
If this sector has to sustain itself, this particular issue needs to be resolved, he added.
Tewari welcomed the increased levels of awareness and strength among South Indian NBFCs on internal auditing and said this helps reduce any instances of risk.
The increased regulatory scrutiny of the NBFC sector is courtesy of the stress the sector faced after the IL&FS crisis in 2018-19, and also the growth we have witnessed, he said.
Currently, more than half of the funding needs of the NBFC sector are funded by banks and the risks involved need to be taken into account, Tewari said, advocating for similar regulation between banks and NBFCs.
National rating agency Icra's financial sector ratings group head Karthik Srinivasan said the banking industry's exposure to NBFCs is at an all-time high of more than a tenth of the overall portfolio, adding that NBFCs that are able to maintain better credit quality will not face any funding challenges.
There are some sectors where there are asset quality issues, he said, adding that some retail NBFCs have been growing riskier unsecured books at double the pace of overall growth in assets under management.